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Peter Vaines of Squire Sanders comments on the seeming double standards applied by politicians in tax policy, and the new General Anti-Abuse Rule.

Tax Incentives

You have to laugh. George Osborne says it is important to make the UK competitive to encourage foreign businesses to set up here. So we have a low rate of corporation tax, special tax reliefs for Research and Development expenditure, an even lower rate of tax on intellectual property and so on. This is called a Good Thing.

However, if Ireland, or Luxembourg, or Jersey (or actually anybody else) has a low rate of corporation tax or introduce tax reliefs to encourage foreign businesses to set up there, they are conspirators in international tax avoidance which is a very Bad Thing.

I read the other day that the German Finance Minister is complaining about our Patent Box legislation (which provides a very low rate of tax on income from intellectual property), saying it should be outlawed because … you know how it goes.

A lot of good can come out of the present initiative for international co-operation on disclosure and tax compliance. However, if everybody regards their tax incentives as sensible fiscal management and tax incentives introduced by anybody else as absolutely unacceptable, then all ideas of possible international co-operation will go straight out of the window.

GAAR

The Finance Act 2013 came into force on 17 July and with it a number of new provisions. One of the most important is the General Anti-Abuse Rule which applies to tax arrangements taking place after that date.

Where arrangements are entered into with a main purpose of obtaining a tax advantage, they will be regarded as abusive (and therefore subject to counteraction) if they "cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions". I may not be the first person to observe that the term "abusive" is therefore being defined as "unreasonable", which many may feel is not the same thing at all.

In deciding whether arrangements can reasonably be regarded as a reasonable course of action, you need to consider whether what you are doing is intended to exploit any shortcomings in the legislation and whether it involves any contrived or abnormal steps. Furthermore, you have to consider what policy objectives should be implied by the legislation. I don't know how the ordinary taxpayer is supposed to do that - but never mind. Unfortunately, it is not enough to come to a sound and honest view of these matters. You have to second guess what HMRC will regard as reasonable (or doubly reasonable) and what they say the policy objectives were. Good luck with that.

If HMRC think that there have been abusive tax arrangements which ought to be counteracted, they will ask the taxpayer to explain why they should not be. If HMRC are not persuaded, they cannot just take counteractive steps immediately. They must first refer the matter to the GAAR Advisory Panel who will express their view. Sounds good - but it will not help.

If the GAAR Advisory Panel says the transactions are OK, HMRC are free to proceed anyway if they do not agree with the Panel. (And as HMRC will have already decided that the arrangements are abusive, they are hardly likely to change their mind).

You will not want to know this next bit. If the matter goes to Court, the Court must take into account the HMRC guidance in deciding what it all means.

Forgive me, but the following extract from Alice inWonderland is irresistible:

" "When I use a word", Humpty Dumpty said, in a rather scornful tone, "it means just what I choose it to mean - neither more nor less".

"The question is", said Alice, "whether you can make words mean so many different things".

"The question is", said Humpty Dumpty, "which is to be master - that's all." "

I wonder where this leaves me on my proposed trip to Paris (which I have mentioned before). I do not want to pay the Airline Passenger Tax and solely for this reason, I go to Paris by Eurostar. Avoiding payment of the tax is my main reason for making the arrangements to go by train. Is this reasonable or abusive? There is clearly a shortcoming in the legislation (the APT does not apply to trains) so my deliberately contrived arrangement to avoid APT should fail.

It won't of course, but only because it is just simple to understand. Parliament did not intend that APT should be charged in these circumstances. Who says so? But it's obvious …. isn't it? Well actually no.

Maybe it is equally obvious that the Patent Box legislation allowing companies a lower rate of tax is exactly what Parliament intended. But not according to the Public Accounts Committee, who think it is tax avoidance. Surely at some point it will be realised that some intellectual rigour should be introduced into the debate.

Anyway, it is no good complaining. This is the law now and it will be very interesting to see how this plays out. One thing seems clear - the initial submissions to HMRC explaining why the arrangements are not abusive are likely to be of paramount importance so I think we tax advisers are in for a lot of work.